China auto sales slump to 17-month low despite price cuts

BEIJING (Bloomberg) -- Chinese consumers bought the fewest passenger vehicles in 17 months in July, extending a slump in the world’s largest auto market as deeper discounts failed to revive demand.

Retail deliveries fell 2.5 percent to 1.3 million units, the lowest level since February 2014, according to the China Passenger Car Association. A separate set of figures from the China Association of Automobile Manufacturers showed passenger-vehicle sales declined 6.6 percent, also to a 17-month low. 

Foreign automakers are facing slumping demand in China because of a slowing economy and resurgent competition from lower-priced local offerings. China's move today to devalue its currency by the most in two decades adds to the challenges by reducing the value of repatriated profits for multinational carmakers.

“International automakers’ cash flow will be impacted, no doubt about it,” said Janet Lewis, an auto analyst at Macquarie Group Ltd. “The U.S. automakers would stand to lose the most, because they’re the strong currency.”

In a statement released Tuesday afternoon, GM said it has built a natural hedge against currency risks by building vehicles in each of its major markets.

"In China, we believe that this approach, along with a well-established local supply chain, mitigates a majority of the risk associated with the devaluation of the yuan," GM said. "We believe that our exposure is limited and manageable, and do not expect that the devaluation will have a material impact on the company's financial performance. We continue to expect strong results in China will be sustained through the remainder of the year."

Ford Motor Co. didn’t immediately respond to e-mailed requests for comment. Volkswagen AG said it saw limited impact from the currency move because of a “high localization rate” and regional currency hedging.

A weaker yuan helps made-in-China vehicle exports, which have shrunk in the last two years and are down 14 percent in the first seven months.

China exports 

Chery Automobile Co., China’s biggest vehicle exporter, said the move to weaken the yuan will help its sales overseas and predicted shipments will rise by 20 percent this year.

“The weakening yuan is good for us,” Yin Tongyue, chairman of Chery Auto, said in an interview in Beijing. “We support it.”

At home in China, carmakers have been combating the slowdown by cutting production and lowering prices. Dealerships are offering incentives at an unprecedented scale to move cars off their parking lots, according to the China Automobile Dealers Association.

Discounts of at least 30 percent are being offered in major cities on hundreds of models, according to Autohome, a popular car-pricing portal.

‘Shocking’ discounts

“It is stunning to see how much profit margins dealers are sacrificing in order to sell cars,” said Luo Lei, a deputy secretary-general at the state-backed dealers group. The level of discounting is “shocking,” he said.

Besides reducing prices, carmakers and dealers are offering incentives such as subsidized insurance, zero down-payments, interest-free financing and boosting trade-in prices, according to brokerage Sanford C. Bernstein & Co.

BMW AG said earlier this month that a sharp slowdown in Chinese demand may force it to revise its profitability goals. GM reported a 4 percent drop in July deliveries, while Ford predicted industrywide sales may decline this year for the first time since at least 1998.

Others like Mazda Motor Corp. and PSA Peugeot Citroen have warned looming price wars in China, as a surfeit of brands compete for buyers amid a slowing economy and volatile stock market.

Even Great Wall, the biggest SUV maker in China and a beneficiary of the shift in demand to budget models, has stumbled despite cutting prices. Its July deliveries slid 1.7 percent, led by its most popular model, the H6.

“Nobody in the industry likes a price war,” said Dong Yang, secretary general of the state-backed auto manufacturers group. “We don’t want to see a price war.”